Restructuring

Contributed by Doron P. Kenter.
Notwithstanding the increased prominence of the bankruptcy bar in recent years, it remains a relatively small community.  Allies in one case can become adversaries in the next (or even in the same case, as we have discussed previously).  And with so much motion practice and judicial oversight in bankruptcy cases, conflicts and recusals are sure to abound.  Indeed, with greater numbers of bankruptcy cases and increasingly larger law firms, it can only become more likely that bankruptcy judges will be faced with more frequent conflicts and ethical questions regarding their relationships with the law firms appearing before them.
In a decision issued in September 2010, Judge John K. Olson of the Bankruptcy Court for the Southern District of Florida unequivocally refused to disqualify himself from a case in which the chapter 7 trustee was represented by a law firm at which Judge Olson’s fiancé practiced.  The court’s decision in Kapila v. Clark (In re Trafford Distributing Center, Inc.) provides a thoughtful and useful guidepost for understanding the boundaries of judges’ impartiality in the matters before them.
In the Kapila adversary proceeding, the defendants filed motions seeking Judge Olson’s recusal, arguing that his impartiality was tainted by the fact that his fiancé worked for the law firm representing the chapter 7 trustee-plaintiff.  In refusing to disqualify himself, Judge Olson looked to 28 U.S.C. § 455 (“Disqualification of justice, judge, or magistrate judge”).
Pursuant to subsection (a) of 28 U.S.C. § 455, a judge “shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.”  In such circumstances, however, he may still preside over the case as long as he (i) discloses the basis for any impartiality and (ii) receives a waiver from the parties of such ground for disqualification.  On the other hand, if any of the grounds for disqualification set forth in subsection (b) exist, then the judge must disqualify himself from the proceeding; disclosure will serve no purpose, and waiver is not an option.  Most of these situations involve actual involvement in the case – by the judge or by her relative – as a witness, lawyer, or party to the proceeding.  The gray area emerges in situations where the judge knows that he, his spouse, or another relative (ranging from great-grandparents to nieces and nephews and their spouses) has “an interest that could be substantially affected by the outcome of the proceeding.”
In Kapila, the Court outlined a series of cases implicating judicial disqualification because of a relative’s potential interest in the case.  Broadly speaking, those cases represent the following principles:
1.         Employees of a law firm, such as associates (or even non-equity “income” partners), are uniformly not considered to have an interest in the outcome of a proceeding (of course, this assumes that they have not themselves worked on that case).
2.         Partners in a law firm may have an interest in the outcome of the proceeding, but the court should look to the facts of the case to determine whether such a partner has a substantial interest in the outcome of the proceeding.
The Kapila decision is noteworthy for several reasons.  First, the decision was silent as to the fact that the judge’s impending marriage would not be recognized by federal law or under Florida state law (because it was to be a union between two men).  While this decision is not likely to be the turning point in civil rights for same-sex couples, it does highlight some of the complexities that same-sex unions can pose for the judiciary itself, and not simply in the matters being adjudicated.
Second, Judge Olson drew no particular distinction between a spouse and a fiancé, stipulating at the hearing on the motion to recuse that his fiancé was the “equivalent of a spouse.”  Even though a long-term intimate relationship may be more stable than some marriages, it becomes difficult to determine the extent to which a relationship can raise questions regarding recusal or conflicts of interest.  If a judge is in a long-term committed relationship with a party with an interest in the case, will that raise the specter of impropriety? What about a short-term committed relationship? Or a long-term non-monogamous relationship?
Lastly, in deciding that recusal was not required, the Court cited to the “disinterested employee” rule in noting that there was a “glass mountain of precedent” that a mere employee does not have a significant interest in the outcome of a case in which he is not involved.  While it may be true that partners are the primary beneficiaries of a law firm’s success, associates have been known to receive bonuses when their firms are successful (often regardless of their own involvement in such successes).  It is even possible that these bonuses can be close to (or more) than the employee’s annual salary.  Or, if a law firm is unsuccessful, employees may be put at risk of taking pay cuts or of being laid off entirely.  In smaller matters, these effects may be minimal, but what of “bet the company” litigation?  Or class action cases with the promise of massive contingency fees, from which all employees of that firm could, no doubt, directly or indirectly benefit?  While there is no “bright line” test in such cases, it is important to recognize that, given the nature of the bankruptcy bar, these scenarios likely will arise with more frequency than they did before.
Epilogue 
Shortly after Judge Olson issued an order denying the defendants’ request for his recusal, the defendants, again, filed what they called “second motions” seeking his recusal.  Judge Olson noted that the motions were, in fact, reconsideration motions that had failed to satisfy the standards for reconsideration.  Nonetheless, because the plaintiff (the chapter 7 trustee) represented to the court that he believed recusal would be “beneficial as a practical matter” and so as to “speed these adversary proceedings to a more prompt conclusion,” Judge Olson entered an order recusing himself from the chapter 7 case and its related adversary proceedings.